Approach structured products with caution

Caution signs

Financial advisers are increasingly recommending that clients include structured products in their portfolios - but they should still be cautious when investing in them.

According to a survey carried out by Morgan Stanley, these investments are now preferred by 76% of IFAs. In comparison, just 55% preferred structured products in a previous survey from December 2008, when both bonds and funds were more popular choices.

Structured products combine traditional investments, such as equities and bonds, with derivative products that provide some element of protection or guarantee. They come in various forms, but in light of the recent market volatility, it's unsurprising that the most popular type - preferred by 86% of IFAs - are those that protect your original capital.

Yet the two years since the credit crunch hit have been difficult for these products; backed by large financial institutions, there have been concerns that some might not be able to honour their guarantees.

Investor confidence was badly damaged by the folding of Lehman Brothers and near-collapse of insurance giant AIG a year ago, and more questions about risk were raised when the structured product specialist Keydata Investment Services went into administration in June this year.

So, even though demand is increasing, investors should remain cautious.

Morgan Stanley's survey shows that the main reason given by IFAs for not using a particular structured product is concern over the credit ratings of the counterparties backing it.
"They have a place as part of a balanced portfolio for lower-risk clients, if the counterparty risk stacks up," says Mike Horseman, chief executive of IFA Cockburn Lucas.

But Anna Sofat, chief executive of IFA Addidi Wealth Management, is less convinced.

"They're a big sell at the moment, but I'm jaundiced about them on the grounds of transparency and cost, and some of them have such a lot of small print," she says.